Twins

I know what you’re thinking. Isn’t the expression “safe AND secure”? Possibly the single most important thing to know about money is this: Safe and secure are often opposites. With money, it’s usually safe OR secure.

It was the disaster in their life that made this clear for Summer and Autumn. They are identical twins. Growing up, they were dressed the same, had the same friends and loved watching the same movies. As adults, they both landed good jobs in the head office for Block Buster, the movie rental company. Everyone thought they were the same – but I knew how different they were inside.

Check out our whiteboard overview, or keep on reading for the complete answer.

They were both good savers and put away $10,000 every year. At age 30, they bought opposite sides of a semi-detached home for $270,000 each in Toronto and both had a mortgage of $216,000. They went for dinner on their birthday to celebrate – the first of many.

Autumn hated debt and decided she would pay off her mortgage as fast as possible. She put all her savings onto her mortgage every year. She wanted to be safe and chose a 5-year fixed mortgage at 3.5% to protect against rising rates.

Summer said she felt secure when she had money, so she focused on building up a nest egg. She wanted to invest as much as possible, so she chose the lowest possible mortgage payment. She took the lowest interest rate, which was a 2-year fixed rate of 2.5%, taking a full 30 years to pay off her mortgage. She figured that her RRSP would make a higher return than her mortgage rate, so she invested all her annual savings, plus her tax refunds, into her RRSP. She decided to build her security by investing for growth.

Life has interesting twists and turns. Thirteen years later, the movie rental business was suffering and there were rumours of layoffs. They talked about it at their 43rd birthday dinner. Autumn was quite worried. “My mortgage is small, but I don’t know how I would make my payments if I lost my job.” Summer was more confident. “I still have a large mortgage, but I’m not worried. My RRSP is up to $310,000 already. It makes me feel secure knowing I could use it to cover my payments, if necessary.”

Fortunately, neither was laid off.

The next year, Autumn finished paying off her mortgage and threw a “mortgage burning party”. She teased Summer incessantly that “the bank still owns your home”.

Every year, they went Dutch at their birthday dinner. This year, Autumn picked up the tab.

Autumn realized that she was now 44 and had not saved a penny for retirement. She thought she would make up for lost time by putting 100% of her mortgage payments into her RRSP, plus her tax refunds. She had no mortgage and now would be a super-saver! She decided she would try to build security by investing safely.

At their 50th birthday dinner, she teased Summer again, “I put $30,000 into my RRSP this year! All you can put away is that same $15,000, because you still have your mortgage.” Summer smiled confidently. “Yes, but my RRSP is now $635,000. My money is working for me. The growth of my investments was more than $40,000 this year.”

Then the axes fell.

The movie rental business was dead. The cruel fate was that it was on their 55th birthday that both were handed a pink slip. They were still stunned at their birthday dinner. “I don’t know how to do anything else”, Autumn lamented. Summer asked,  ”Who will hire us now at 55?”

Autumn was worried, “Thank god I’ve been saving $30,000 every year for the last 11 years. I’ve saved $350,000. I figure that will last me 8 years, which should be more than enough time to find some sort of job.”

Summer was confident. “I guess I’m going to retire.” “Retire? How can you retire, Summer?? You still have a mortgage!” Autumn protested. Summer pulled out a napkin to write a few numbers. “There’s only 5 years left on my mortgage. After that, I need $40,000 per year growing by inflation to live. With the 4% rule of thumb, I need $1 million to be secure. My nest egg is $980,000 now, which is close enough to retire comfortably.”

Autumn was impressed. “You are so lucky to be in this position. Did you plan this?” Summer smiled. “Actually, my plan from 25 years ago was to retire more comfortably at age 60 on $60,000/year. I calculated that I would need $1.5 million to be financially secure and I was on track. I’m okay with $40,000/year. It maintains the lifestyle I’ve had all these years. Most likely, my investments will average more than 4%, so I will be able to take a higher income in a few years.” Summer picked up the tab.

To add to their cruel fate, over the next few months, the stock market crashed. It was the biggest crash in 80 years! Right after losing their jobs! And right after Summer retired!

Autumn was still anxious about not being able to find work, but completely relieved about her investments. “Thank god I only have GICs and bonds! The interest is low, but I didn’t lose anything last year.”

Summer was unfazed. “I’m down a lot, but it’ll come back. I’ve been 100% in equities all these years and I’m comfortable with it. One bad year does not change the fact that they give the best returns long term. In the long run, the downs are temporary, while the ups are permanent.”

Summer had found a great steak and seafood place for their 56th dinner. “Autumn, you have to meet the chef. His name is Jason and he usually takes the time to come out and say hi to me. He is the one that told me about cruising. I loved my first cruise! How did we miss this all these years? It’s the world’s biggest resort and every couple days they bring a new city to you! I’m going to go twice every year.”

Autumn was staring off in space. “I’d love to join you, Summer. As soon as I find a job, I’m there.”

Summer could see the anxiety on her face. “Autumn, you’re my sister. You need a break from all this job hunting to get your confidence back. Come with me on the next cruise – it’s on me.” This was also the first of many.

Autumn never did find another job, but Summer took her along on 2 cruises each year. They both loved cruises. For Autumn, they were the only time of year she did not worry about money.

They were in the Caribbean for their 63rd birthday dinner. But Autumn was depressed. She finally came out with it. “Summer, I don’t know what I’m going to do. My RRSP withdrawal next month will bring it down to zero. I’m completely out of money! All I have left is my home.”

Summer sat silently for a couple minutes, deep in thought. Then she looked into her sister’s eyes. “Autumn, you’re my sister and I love you. You’ve been so worried about money these last 8 years and I can’t stand seeing you like this. I got some advice and I have enough to support you. We can both start taking CPP now. After the CPP, you need $30,000 per year and you can stop worrying. I want to just give that to you.”

Autumn was stunned. “That’s so generous, Summer! But I can’t accept it. You’ve already been so generous to me. Look, all my money is in my house and I have nothing to live on. Obviously, I have to sell.”

Summer was disappointed. “We’ve been neighbours for 33 years, Autumn.”

Then she grabbed a clean napkin and did some math. “Your house is worth $500,000. If you rent an inexpensive apartment, the money from your house sale invested in your safe investments will cover you for only 10 years. If you rent downtown so that you can give up your car, it should last about 12 years.” Autumn looked lost. “That’s not long enough. I’m going to outlive my money.”

“You know, Autumn, if you didn’t invest so safely, your future would be secure.”

“What do mean by that?”, protested Autumn. Summer continued, “You would have almost enough money. If you invested like I do and cut your expenses by $1,000/month, you would be okay. If you let me continue to pay for your cruises twice a year, you’re almost there.” Autumn was shocked. “Really?? But this is my house money. I can’t afford to lose it.”

Summer objected: “Autumn, it’s the opposite. What you can’t afford is not having your money working for you.”

Autumn was lost in thought. After a few minutes, Summer offered: “You have options, Autumn. My offer to support you still stands. Or I could put an apartment in my basement for you and then we can still be neighbours. Or, if you trust me and can remain optimistic in down markets, I’ll help you invest the money from selling your house into the same investments I’ve owned that have given me my security.”

That was the turning point in Autumn’s life. “I guess it’s my turn to retire now.”

Summer ordered some champagne to celebrate. Autumn raised her glass. “A toast to you, Summer. All these years, I tried to be safe. But it didn’t make me secure at all.”

She paused. “I see the light now. I thought everything you did was risky. You didn’t pay your mortgage off, you took a short term mortgage, you invested only in equities, you didn’t worry when your investments crashed, and then you retired with a mortgage. But you were just focused on building up your investments. You are the one that has always been secure. Your nest egg is your security.”

It took Autumn 33 years to learn this invaluable lesson. What about you? Is your money safe OR secure?

Ed

13 Comments

  1. Les M on July 14, 2016 at 11:57 am

    Thank you, Ed. A very well explained example of two different options and their long term benefits and/or shortfalls!
    Regards,



  2. Ed Rempel on July 14, 2016 at 2:30 pm

    Thanks Les. I’m glad you found it useful.



  3. Leonard D Rempel on April 20, 2018 at 2:32 pm

    I am firmly in “Summer’s” Camp.
    My mortgage is 2.5% and diversified investments returning 7.5% annually.

    I thoroughly enjoy you blog and thoughts on financial independence.



  4. Ed Rempel on April 20, 2018 at 3:05 pm

    Hi Leonard,

    Good for you! Thanks for the kind words.

    By the way, nice last name, Leonard!

    Ed



  5. Leonard D Rempel on April 20, 2018 at 3:24 pm

    I agree.
    So does my brother Ed.
    Yup, strange but true. He is a farmer from Manitoba



  6. Ed Rempel on April 20, 2018 at 3:32 pm

    Hi Leonard,

    Your brother is also Ed Rempel? Is he the President of the Canola Growers Association?

    I come across his name occassionally. My cousin Curt Rempel is VP of the Canola Council of Canada.

    I could have been like your brother. I grew up in Manitoba and my Dad was born on the family farm.

    Ed



  7. Leonard D Rempel on April 20, 2018 at 3:55 pm

    Ed,
    That’s him. We were all born and raised in Starbuck. He’s still there, living the retired farmer dream!

    On a topic you are so familiar with,,,,,,,Retirement and financial planning.
    My wife and I are about two years out to live the Canadian dream, freedom 60.

    The savings, investing, financial planning/budgeting/life in retirement are all looking really good.

    My area of confusion and research right now involve HOW to draw funds from our various RSP’s, LIRA’s, TFSAs and non-registered investments in retirement. So many variables such as CPP, OAS clawback’s, minimizing taxes, etc.
    Can you recommend some reading material on the subject, until the time comes (less than 1 year) before I need to seek out professional help such as your services on this issue.
    Thanks.



  8. Ed Rempel on April 22, 2018 at 2:20 pm

    Hi Leonard,

    Say hi to Ed from me. I have an alert that tells me whenever my name appears in the news. It’s annoying how often it’s him and not me! 🙂

    Planning ahead for retirement usually has more significant benefits than planning the structure of your retirement income. You can decide ahead of time the exact retirement lifestyle you want, know what to do to achieve it, and plan ahead for the optimal mix of accounts and investments.

    Planning years before retirement usually changes what you do in order to live more comfortably during retirement.

    To answer your question, the best way to structure your retirement income depends on many factors. Often, I plan a target taxable income at the top of a low tax bracket. Withdraw as much as possible at the low tax bracket.

    Sometimes, you can qualify for the “8-Year GIS Strategy”. You have to plan ahead for it and it is opposite to the normal structure. It is surprising how many people can get it. I have helped a few clients with multi-million dollar portfolios qualify for 8 years or more of maximum GIS.

    Maximizing how much you can withdraw, splitting income, tax-efficient investing, tax-deductible fees, options for home equity, and leaving a legacy are all often important factors.

    For some reading material based on research and not the conventional wisdom, here is suggested reading:

    The 6 Best Strategies to Minimize Tax on Your Retirement Income (as seen in Canadian MoneySaver)
    How to Reliably Maximize Your Retirement Income – Is the “4% Rule” Safe?
    Make Your Retirement Comfortable with the “8-Year GIS Strategy”
    When can I Retire with the Lifestyle I Want? (As seen in October 2017 issue of Canadian MoneySaver)
    Can we retire now? Ed Rempel tests retirement income rules of thumb
    TFSA or RRSP? – The Right Answer for You
    Should I start my CPP early? – Real-Life Examples
    Should I Delay CPP & OAS Until Age 70? – Complete Answer with Real-Life Examples

    I hope that’s helpful for you, Leonard.

    Ed



  9. vicky minich on February 18, 2020 at 1:16 am

    Hi Ed,

    Will the 8 year GIS strategy work for a spouse only or do both partners have to be applying it? Thanks.



  10. Ed Rempel on February 22, 2020 at 11:53 pm

    Hi Vicky,

    GIS is based on family income. You have to consider your spouse’s income when planning for the “8-year GIS Strategy”.

    The formula varies if your spouse is older or younger than you. Service Canada has 4 tables to calculate GIS depending on whether you are single, married, and whether your spouse also collects OAS.

    Ed



  11. vicky minich on February 23, 2020 at 5:32 pm

    Gosh, the things I wish I had learned many moons ago. It may be a little too late for us to apply that strategy. Changing topics and perhaps you can or can’t answer this but can you deduct an online course you took to teach you how to invest in the stock market as an expense? and a membership to Motley Fool as well? Thanks.

    Vicky



  12. Ed Rempel on February 25, 2020 at 11:48 pm

    Hi Vicky,

    Sorry, but online investing courses and memberships are not tax deductible.

    Ed



  13. Phil Gosselin on October 26, 2020 at 6:21 pm

    Hi Ed,
    Your reading list for Leonard looks invaluable. I suspect much of it comes too late for me as I have been retired for many years; however, I plan to read it and pass it on to my son and daughter.
    Thanks for the valuable service you provide.



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